Technical Analysis: How to Read Stock Charts and Spot Market Trends
Chapter 5 of Stock Market Cash Flow (ISBN: 978-1-937832-48-3) by Andy Tanner moves into the second pillar: technical analysis. If fundamental analysis tells you the strength of a company, technical analysis tells you the strength of the market for that company’s stock.
In plain terms? You’re studying what investors are actually doing with their money. Not what they say they’ll do. What they actually do.
You’re Studying Feelings
That might sound weird for something that involves charts and numbers. But Andy frames it this way: technical analysis is about investor sentiment. How do people feel about a stock?
If they like it, they buy it. If they don’t, they sell it. A stock chart is just a picture of those feelings over time.
When a stock price goes up, it means more people want to buy than sell. When it goes down, more people want to sell than buy. The chart captures all of this in a visual way that’s easier to read than spreadsheets of numbers.
Why You Need Both Pillars
Andy tells the Enron story here, and it’s a good one.
Enron’s CEO Ken Lay stood in front of employees and said there were no problems. The company was “in the strongest shape ever.” The financial statements looked fine. Analysts were bullish. Everyone believed the fundamentals.
But they were lying. The books were cooked.
Here’s the thing though. The stock chart told the truth. While management was saying everything was fine, the chart showed the stock price falling. Someone was selling. Big money was getting out. The chart captured the real behavior even though the official story was fake.
Andy’s lesson: fundamentals tell you WHAT is likely to happen. Technicals tell you WHEN. You need both. A company might have great fundamentals, but if the chart shows a downtrend, the timing might be wrong. And sometimes the chart reveals problems that the financial statements hide.
Charts don’t lie, even when companies do.
Market Makers: The Middlemen
Before getting into chart patterns, Andy explains how stock prices actually get set. There are people called market makers who sit between buyers and sellers.
They maintain two prices:
- Bid price: What they’ll buy your stock for
- Ask price: What they’ll sell stock to you for
The ask is always higher than the bid. That difference is called the spread, and it’s how market makers make money. They buy at $49.90 and sell at $50.10. That $0.20 gap is their profit on each share.
Market makers also serve an important role. They keep the market liquid. If nobody was willing to buy when you wanted to sell, you’d be stuck. Market makers are always willing to be on the other side of your trade, which keeps things moving.
They constantly adjust their bid and ask prices to keep a balance between buyers and sellers. When too many people want to buy, they raise prices. When too many want to sell, they lower them. This constant adjustment is what creates the patterns you see on charts.
Support and Resistance
This is the bread and butter of technical analysis.
Support is the price level where enough investors say “yes, I’ll buy at this price.” It acts like a floor. When a stock drops to its support level, buyers step in and the price bounces back up.
Resistance is the opposite. It’s the price level where investors say “no thanks, that’s too expensive.” It acts like a ceiling. When a stock rises to its resistance level, buyers stop buying (or sellers start selling) and the price drops back down.
A stock bounces between these levels like a ball between a floor and a ceiling. And watching this pattern helps you figure out when a stock is likely to reverse direction.
Over time, support and resistance levels change. If a stock breaks through resistance with enough momentum, that old resistance level often becomes the new support. And if a stock crashes through support, that old support can become new resistance.
Swing Highs and Swing Lows
Andy describes stock chart patterns as a series of mountain peaks and valleys.
Swing highs are the peaks. These are the resistance points where the price topped out before dropping back.
Swing lows are the valleys. These are the support points where the price bottomed out before climbing back.
The pattern of these peaks and valleys tells you the trend:
- Uptrend: Both the swing highs AND swing lows keep getting higher. Each peak is higher than the last, and each valley is higher than the last. This means demand is strong and growing.
- Downtrend: Both the swing highs AND swing lows keep getting lower. Each peak and valley is lower than the one before. Supply is overwhelming demand.
- Sideways/Stagnant: The peaks and valleys stay roughly at the same level. Supply and demand are balanced, and the stock isn’t going anywhere with conviction.
The key word here is “both.” For a true uptrend, you need higher highs AND higher lows. If the highs keep going up but the lows start dropping, that trend is weakening.
Three Types of Trends
Andy keeps it simple:
- Uptrend: High demand, low supply. More buyers than sellers. Prices move up over time.
- Downtrend: High supply, low demand. More sellers than buyers. Prices move down over time.
- Sideways: Supply and demand are roughly equal. Prices move within a range without clear direction.
The practical value? If you can identify the trend, you can choose strategies that match it. Certain strategies work best in uptrends, others in downtrends, and others when things are moving sideways. (Andy covers those strategies in the cash flow pillar, which comes later.)
It Works for More Than Just Stocks
One thing Andy emphasizes is that technical analysis works for any asset class. Real estate prices have trends. Gold has trends. Oil has trends. Currencies have trends.
The same principles of supply and demand, support and resistance, swing highs and swing lows apply everywhere. Once you learn to read a chart, you can apply that skill to pretty much any market.
Beyond the Basics
Andy briefly mentions some additional tools that technical analysts use:
- Moving averages: Smooth out price data to show the overall trend more clearly
- Candlestick charts: Show the open, close, high, and low price for each time period in a single visual
- Volume: How many shares were traded. High volume confirms that a price move has conviction behind it
These tools layer on top of the basics. But the foundation is always the same: support, resistance, trends, and the story of supply and demand.
What to Take Away
Technical analysis isn’t about predicting the future with certainty. It’s about understanding what investors are doing right now and what they’ve done in the past. Patterns repeat because human psychology repeats. Fear and greed show up on charts as predictable patterns.
Combined with fundamental analysis, you’ve now got two powerful ways to gather information. You know the health of the company (Pillar 1) and the mood of the market (Pillar 2).
Next up: the action pillars. Cash flow strategies and risk management. That’s where you actually start making moves.